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Executive Highlights

BD and Medtronic announced an exclusive, worldwide collaboration to commercialize BD’s new FlowSmart infusion set. Launch is expected in 2016. BD oversaw all design and development work and will manufacture the sets; Medtronic is managing worldwide distribution.

The set will be made available for both Medtronic and non-Medtronic pumpers, and will be branded BD/Medtronic.

We discuss the potential of the impact of the new deal on patients, Medtronic, BD, other pump companies, Unomedical, and HCT/JDRF, share our key questions, and provide previous coverage of the new set.

BD and Medtronic announced earlier this week an exclusive, worldwide collaboration to commercialize BD’s new FlowSmart infusion set – we’re back having done a bit more thinking on the competitive and other implications of the deal. As a quick reminder, in case you missed our summary: the set will launch in 2016, roughly on par with BD’s previous timeline to launch in FY16 (October 2015-September 2016).

The set will be made available for both Medtronic and non-Medtronic pumpers, and Medtronic will control distribution in both cases. As far as we understand it, patients at other pump companies who want the set will either (i) become Medtronic customers to access it; or (ii) go through a distributor, who would in turn buy it from Medtronic. This piece of the agreement was characterized in management’s discussion with us as Medtronic providing expansive coverage “for all patients” – indeed, we are encouraged that the set will become available for Tandem, Roche, and Animas pumpers, although this deal structure was probably not the expectation from the start, when the Helmsley Charitable Trust and JDRF funded this. On that note – this deal is exciting as a first public/private partnership with two major nonprofits and a major public company (BD). That said the deal is less than positive from a healthy pump ecosystem perspective; margin implications are clear for the smaller players – negative. Although theoretically, BD could have supplied all pump companies with the set, as we understand it, this was not possible given Medtronic’s power to demand exclusivity in terms of distribution (enabling it to gain key information on a broader group of pumpers) or not provide it to patients themselves – failing to sign with Medtronic would mean the vast majority of patients wouldn’t have access, which we certainly wouldn’t want to see. That Medtronic has the market power to prompt the agreement reflects its might and market share, to be sure; it’s also away from the interoperable trend in which the diabetes care ecosystem is now operating.

Below, we discuss the new impact of the deal on patients, Medtronic, BD, other pump companies, Convatec (Unomedical), and HCT/JDRF; share our key questions; and provide previous coverage of the new set.

How does the deal impact ___ ?

PATIENTS: Ultimately, the deal is a clear positive for pump patients, particularly Medtronic pumpers, since they get access to the next-gen set with some meaningful insulin delivery and form factor improvements (see below). While it should be relatively easy for non-Medtronic pumpers to get the set, it will be a bit more of a hassle factor – by and large, this is not a big deal. The more immediate concern (particularly in the wake of Asante closing recently) is that for non Medtronic pumpers, the companies from which they buy their pumps are weakened meaningfully by the deal and the “thriving competitive marketplace” will presumably become weaker. While this is just a result of Medtronic using its market muscle, philosophically, how Medtronic leverages its large customer base is of interest to the diabetes community – as we understand it, Medtronic would not have made the new set available to its customer base without the agreement. This is market power! On one hand, it’s impressive, since it means Medtronic will grow faster and put more funds into R&D and get innovation to customers faster. On the other hand, market expansion with more neutral implications for competitors would be more attractive to see at the current time, when the infrastructure of the field is clearly more fragile. A weakened infrastructure is not a positive for patients from our view.

To boot, we have seen a trend toward more rather than less interoperability in the marketplace for some time (e.g., Tidepool, Diasend, etc.) and it would have been great to see all manufacturers have access to the same new innovation. In our view, Medtronic has two major incentives to get this out to all patients – the margins on sets are high, and every set sale to a non-Medtronic patient takes revenue away from another pump company and brings that customer closer to Medtronic. We certainly have been excited about Medtronic Diabetes Care working to get to 20 million patients by 2020 – we were originally envisioning those patients as “new” to pumping or insulin delivery via Medtronic, rather than being existing customers elsewhere (admittedly perhaps a naïve view). How quickly the new BD/Medtronic set may be adopted remains a question; while there could be a bit of a stickiness/ inertia factor of some kind while existing sets last patients, we expect that because the new set seems fantastic, many patients will want to try it – we also assume BD/Medtronic will make the switch in ordering process as fluid as possible and that initial pricing will be attractive. While we are unsure of what incentives will be put in place for patients to try the new set, we imagine there will be some! Many patients in the online community are very excited about this set, so we could see uptake going very fast indeed, particularly if the co-pay is the same. As a side note, we aren’t sure what the margin difference is for Medtronic on the new BD set as opposed to the traditional sets Medtronic pumpers use and buy from Medtronic. We know from a patient perspective from time spent with BD’s management team and patient advocacy groups that BD was very committed to having the sets be made available to the largest customer group in the world – although it could have risked not making it available to the largest company, we can imagine that would be a hard task to take on.

MEDTRONIC:This exclusive, worldwide deal is a major victory for Medtronic and certainly shows the company’s ability to exert commercial muscle over collaborators and pump competitors. Medtronic is clearly very commercially tough and eager to leverage its market power – indeed, we want companies to have strong businesses, though ideally through market expansion rather than competitive tactics that veer toward some companies losing out 100% on access to new technology. The exclusive distribution deal was characterized as better access for all pump patients; while the easiest access would’ve been through the same pump companies from whom patients purchased their pumps, it is a positive that Medtronic didn’t shut out patients with competitive pump systems from gaining access to the technology at all – we imagine this may have been considered and rejected. Certainly, it would have been quite unpopular and not in line with Medtronic’s business principles. Most of all, this deal is a negative for other pump companies, who will lose the margins on traditional set sales, and cannot offer this set directly to their own customers – the new distribution arrangements may make it more of a hassle for patients who use non-Medtronic pumps although it’s probably not too big of a hassle (presumably Medtronic will work to make the transitions easy). As of last year’s Analyst Day, Medtronic’s pump accessories and consumables business represented $800 million per year, about 50% of its $1.65 billion in Diabetes revenue last fiscal year. In other words, there is a lot at stake here, and we certainly expect Medtronic’s revenue in this business to increase. It should also drive innovation at other companies like Convatec.

BD: This deal unquestionably made it challenging for BD to serve every patient. BD could have remained independent and sold the set to all the pump players (e.g., like Convatec [Unomedical] as a contract manufacturer), or perhaps gone direct to consumers despite the hassle factor and higher expense. The challenge, of course, is that Medtronic has the vast majority of the insulin pump market, along with a proprietary reservoir connecter. Had BD not signed a deal with Medtronic, BD likely would have shrunk the potential market far too small to have a viable business – while patients could have presumably purchased sets from other distributors, it’s unknown has much this would have affected forecasting, production, etc. – presumably quite a lot. While the contract manufacturing approach could have been a better route from a patient perspective, we doubt this was an option for BD – it’s also true that were this the direction that BD had headed, all the companies would have had margin reductions (not just companies outside Medtronic.

OTHER PUMP COMPANIES: The clear loser in this deal is other pump companies, who now cannot offer the set directly to their own customers, meaning the loss of high-margin revenue to the one company they don’t want to give it to, as well as no new marketing opportunities. We doubt the availability of the set will cause many patients to actively move to Medtronic pumps, but from a business perspective, this is a tough deal to swallow for other players in the pump market – hearing that their major competitor will only offer this innovative product to their own customers through an exclusive deal with BD.

UNOMEDICAL (CONVATEC): Short-term, the publicity on this set is negative for Unomedical, who has been blamed for not innovating in infusion sets. Of course, it would have been worse from a financial perspective if every company gained distribution access to the new set. We can only assume the news will push Unomedical faster to work on next-gen improvements. This company tends to be quite stealth and hard to follow, but one thing generally proves true in our experience – competition drives faster innovation.

HCT/JDRF: This news is a win for HCT/JDRF, as it is the first product to come from HCT/JDRF funding a commercial development program and a positive example of a non-profit/industry partnership bringing a meaningful advance to people with diabetes. JDRF’s Dr. Aaron Kowalski and HCT’s David Panzirer were quoted in the announcement, as both organizations helped bring this to market. We believe that in the future, they will be working hard to pursue even more interoperability for patients among companies. Perhaps the funding agreement might be structured differently in the future.

Close Concerns Questions

How will Medtronic take this to market?

How quickly will it be adopted?

How aggressively will FlowSmart be marketed vs. the current Unomedical sets?

How will BD’s claims of product superiority emerge to patients?

How willing and/or eager will patients be to switch to a new set?

How will it be priced, and will patients see any downstream out-of-pocket for the potentially higher price?

Will FlowSmart be provably superior in real world use (e.g., time-in-range, hypoglycemia, A1c, etc.)?

Up Close with the New Set

We got an up close look at BD’s infusion set at its headquarters in May and were impressed with some of the new form factor improvements beyond the side-ported catheter that reduces flow interruptions (shown at ATTD): a less painful, 30 gauge insertion needle, making this the smallest infusion set insertion needle on the market (roughly similar to a pen needle in size); a multi-position connector that allows patients to connect the tubing to the on-body set in eight different positions (e.g., no need to line it up); a sliding shield that covers the insertion needle and contains it after insertion, helping to prevent accidental needlesticks (also great for those who are needlephobic); options for both manual insertion and insertion with the Quick-Set inserter; and both 24 and 42 inch tubing lengths. BD talked to over 1,000 patients in the set’s development process, as well as many healthcare providers – the feedback is certainly apparent in the product’s design, and we expect many patients will appreciate these improvements.

BD’s new set revolves around a new catheter, using their “FlowSmart technology,” which allows insulin to flow out of two places: the bottom (like current infusion sets) and the side (a new innovation). The result, as was shown in a human study at ATTD, is significantly more reliable insulin delivery. Compared to Medtronic’s Quick-set, the BD set reduced the occurrence of flow interruptions by 75% and silent occlusions by 91%. The set should especially help patients avoid “silent occlusions,” which are often not detected by the pump and could lead to unexplained high blood sugars in some patients. What remains unclear is how clinically meaningful these will be.